Valero considers parting with corner stores

Updated 12:12 am, Wednesday, August 1, 2012

San Antonio-based refiner Valero Energy Corp.'s announcement Tuesday that its profit rose 12 percent in the second quarter came with a surprise: It wants to split its retail business from the rest of the company.

Analysts said such a move could make for two valuable companies and raise the price of Valero's shares.

Valero, North America's largest independent refiner, is reviewing options for spinning off the retail business, including distributing shares in a new company to current shareholders.

In the wake of a retail spinoff, Valero would remain a refining and marketing company, but “we won't be selling Twinkies and beer and cigarettes,” CEO Bill Klesse told analysts in a conference call Tuesday.

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After a split, “we will still run a branded wholesale business,” Klesse said, providing fuel to 4,000 independently owned, Valero-branded sites in the United States and 1,000 independently owned sites in the United Kingdom and Ireland.

Valero spokesman Bill Day said that in a split of Valero's retail operations, “the independent company would basically become our biggest wholesale dealer.”

But an outright sale of Valero's retail business also is possible. “All options are on the table,” Klesse said.

A retail spinoff would be “a pumped-up way to return value to shareholders,” Raymond James & Associates' Houston office said in a note to clients. That's because publicly traded convenience store companies trade at values higher than refining companies.

Valero's retail business is comparable to other retailers that trade at a multiple of about 10 times EBITDA, he noted. Valero's retail segment would be valued at as much as $5 billion, according to calculations by Bloomberg.

Retail is less volatile than refining, and for shareholders of a Valero retail spinoff, “that's a nice insulation to have,” said Raymond James' research associate Stacey Hudson. “As a stand-alone company, retail will get a lot more attention than it gets now.”

Raymond James noted that a spinoff of retail assets “is not entirely unheard of.” Murphy Oil Corp., based in El Dorado, Ark., is analyzing the potential of a retail spinoff.

“As independent companies, both retail and the remaining business will be better positioned to focus on their industry-specific strategies,” Klesse said.

Sam Margolin, a vice president at Dahlman Rose & Co. LLC in New York, characterized Valero's plan to split retail as “strong. The business is worth a lot more money on its own.”

Valero's shares are undervalued, Margolin said, and separating the retail business could boost its shares because “they get no credit for (retail) now.”

Valero owns 1,027 retail stores in the U.S. and 775 in Canada, and Klesse described the company's retail business as being “very well run ... an extremely solid business. We're up there with the very best, if not the best.”

Valero has 16 refineries in North America and Europe.

Valero's retail segment reported record quarterly operating income of $172 million in the second quarter, compared with $135 million of operating income in the year-ago period. The company credited higher fuel margins and volumes for the showing.

Valero's shares rose 5.4 percent on the news, up $1.42 a share, to close at $27.50 in New York Stock Exchange trading.

Valero said its net income rose in the quarter ended June 30 to $831 million, or $1.50 a share, compared with net income of $744 million, or $1.31 a share, for the year-earlier period.

The showing exceeded analysts' expectations, as polled by Bloomberg, that Valero would earn $1.43 a share.